BLACK SEA BLOG: Romania's engines starting, but still choking

By bne IntelliNews April 5, 2011

Bogdan Preda in Bucharest -

Yes, it's true, there is indeed serious talk that Romania could see some real economic growth resuming even as soon as the first quarter and by as much as 1.5% for the entire year. At least this is what the government and the International Monetary Fund (IMF) are betting on.

Still, investment connoisseurs are holding off putting down any money yet. Regardless of whether official statistics indicate sometime in the first half of May that growth has returned after more than two years of contraction, 2011 is still being seen as a transition year that will only lay the ground for 2012.

Whether that ground in 2012 will be smoother or rougher than expected depends on another factor: Romania will hold legislative elections in 2012, and politicians will be fighting to secure another four years during which they can enrich themselves and will do so by breaking promises of economic austerity that have thus far restored some financial discipline and narrowed deficits under IMF and EU pressure. So that could again bring about recession. "The only good news is that we've got so much length to go so that when Europe will somehow pull together, emerging countries especially like us shall get a bigger piece of cheese to eat than the others," was the way that Ion Tiriac, one of Romania's richest businessmen, described the country's situation in a ProTV programme on March 5.

What Tiriac, formerly the coach of German tennis star Boris Becker, meant was that there is still a lot of room for growth in Romania. He believes that 2011 will be similar to 2010 and that Romania could start pulling out of the crisis only in 2012.

However, such growth cannot and will not be robust if Romania doesn't also turn to production and healthy investments instead of building its economy on growing consumption, as it has done in recent years. "We became amorphous. No one is talking about us anymore. I paid a visit at a car show two days ago and got invited to have dinner with another 50 guests, starting with Mr Peugeot, Mr Porsche, Mr Cartier and many other such brands, and I was told, 'look what a silent country you've got, there's no more talk about it,'" Tiriac related.

Where did all the money go?

In the past two years, Romania has lost €13bn from its nominal GDP and more than 11,000 companies, mostly local ones, with a total turnover exceeding €11bn, have become insolvent, according to a statistics put together by business daily Ziarul Financiar.

Tiriac, one of Romania's most respected business people, went on to criticise the government for failing to do enough to encourage investments in the EU country by improving infrastructure, while wasting huge amounts of money. "Tell me please, where did about half of the GDP revenue or about €500bn for the past 20 years go? This money should show something. Where's this money, for I don't know where it is?" Tiriac asked, arguing that he should have the right to know what the money his companies pay as taxes is being used for.

About 20 years ago, when it broke with communism and the euro didn't yet exist, Romania had an economy worth about $40bn a year. In 2008, when the global financial crisis reached the country, its economy had grown to about $200bn. Despite such growth and the many billions of euros the country could have received as non-reimbursable funds in the past four years since it joined the EU, Romania's infrastructure remains very poor, and its health and education systems are creaking.

And as if it weren't enough, Romania's public debt increased from the equivalent of about €5bn in 1998 to almost €37bn in 2010, when it was forced to ask the IMF and World Bank to rescue its badly managed policies with a new austerity-backed lending programme totalling €20bn.

Since July, the government has taken measures that have mainly hurt the general population rather than improving its policies or money management. It has increased the VAT tax from 19% to 24%, among the highest rates in Europe, while slashing a quarter of the salaries of its 1.4m government employees, cut state pensions by 15% and also partially or entirely slashed other forms of social aid, including child-care allowances. Additional actions included starting to tax interest rates on almost any kind of bank deposits from zero to 16%, tax foreign-exchange operations, additional house ownership and much more.

New deal

Such measures narrowed the budget deficit and brought back some hope for growth. What the government failed to do though was implement a sound national investment and EU-funding absorption plan that would restore its credibility and bring back foreign investors. Many such investors are still staying away from Romania for reasons starting with corruption and red tape, and ending with a business environment that is less predictable than in neighbouring Bulgaria, for example. Annual foreign direct investments in Romania decreased to less than €3bn in 2010 from about €4.5bn in 2008.

Still, the IMF's executive board on March 25 approved a new 24-month precautionary stand-by loan to Romania totalling another €3.5bn, which the government said it doesn't plan to draw on. That remains to be seen, as is also the case with the additional precautionary support of €1.4bn from the EU, plus €400m from the World Bank. The IMF said that, "the fiscal and structural measures already implemented are yielding results. The economy has stabilized and growth is resuming."

Yet all of this money that Romania has borrowed, and may still need to borrow, will eventually have to be paid back over the coming years, while billions of euros that come for free from the EU are still not being drawn due to a lack of project implementation policies.

Romania drew on less than a third of the nearly €9bn available from the EU for the 2007-2010 post-accession period, simply because it didn't have the right programmes in place to implement the absorption of such funds, whose disbursement is strictly monitored to prevent funnelling of cuts to third parties. Ironically, the fields in which Romania drew the smallest amount of money from the EU are those in most need of investment: infrastructure and transport with just 2.3% of total available funds absorbed, and public administration with just 7.8%. "We haven't used anything of this money to start the car," Tiriac noted.

According to Tiriac, the real sign of economic recovery in Romania will be when banks resume more serious lending in terms of volumes, meaning that borrowers' trust in bank loans shall also be restored. "Banks have a lot of money now, even in Romania there is money in the banks, but they're so prudent or even hyper-prudent because they don't exactly know where, how, what and to whom they should give money," Tiriac said.

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